August 2017 JD Supra
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Taxpayers with unreported foreign financial assets and income run the risk of having the Government determine if their conduct was willful or non-willful.  The definition of “Willful” or “non-willful” in Taxpayer’s conduct makes a big difference in how civil or criminal penalties are assessed for unreported financial accounts and financial assets.

If IRS identifies a Taxpayer prior to the Taxpayer coming forward voluntarily, IRS has first choice to define the conduct as willful or non-willful.  Coming forward voluntarily provides the Taxpayer the option of choosing a strategy that can provide protection against penalties, and incarceration.

The US has information exchange agreements with other tax jurisdictions that govern the exchange of information for tax purposes.  These international agreements include bilateral double tax conventions, tax information exchange agreements (TIEAs), intergovernmental agreements (IGAs) to implement the Foreign Account Tax Compliance Act (FATCA), and the Convention on Mutual Administrative Assistance in Tax Matters. A Taxpayer can be identified by the IRS as having unreported accounts though any of these programs.

Once this information enters the IRS system, Taxpayers are at risk of receiving a request for records of foreign accounts.  At this point, Taxpayers are no longer able to join tax amnesty programs sponsored by IRS such as the Streamlined Filing Compliance Procedures or the Offshore Voluntary Disclosure Program.   Taxpayers are ineligible to use these programs if IRS has initiated a civil examination of Taxpayer’s returns for any taxable year, or if a Taxpayer is under criminal investigation by IRS Criminal Investigation.

Taxpayers able to truthfully certify that their failure to report foreign financial assets and meet certain other requirements was non-willful and pay all tax due in respect of those assets can use Streamlined Filing Compliance Procedures for curing non-compliance.  Taxpayers concerned that their failure to report income, pay tax, and submit tax returns was willful conduct,  and who seek assurance that they will not be subject to criminal liability should consider participating the Offshore Voluntary Disclosure Program.

What does IRS consider willful or non-willful?

According to IRS:   “Willfulness is defined as a voluntary, intentional violation of a known legal duty.  A good faith misunderstanding of the law or good faith belief that one is not violating the law negates willfulness”.   Per the Internal Revenue Manual:

  • The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.
  • A finding of willfulness under the Bank Secrecy Act (BSA) must be supported by evidence of willfulness.
  • The burden of establishing willfulness is on the IRS.
  • Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR (Foreign Bank Account Report) situation, the person only need know that a reporting requirement exists. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.
  • Under the concept of “willful blindness,” willfulness is attributed to a person who made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.

Taxpayers have more control with resolving an out of compliance situation by voluntarily disclosing unreported accounts.  Much has been said to Taxpayers about the requirement to report offshore assets and income.  Consequently, Taxpayers that make the decision to not come forward voluntarily can be perceived as acting in a “willful” manner, losing control of their options and facing penalties, fines and possible criminal prosecution.

Taxpayers should not be victims of their own making.  They ought to come forward and voluntarily report their offshore assets and accounts before the IRS.  Taxpayer’s tax advisors needs to understand the Taxpayer’s conduct and determine the best course of action with detailed explanations.